Uranium is Hot: Reasons Behind the Radioactive Run-up

Uranium has been a hot topic recently, and not always for a good reason: the efforts by countries like Iran and North Korea to secure supplies of enriched uranium worry many around the world.

For investors, however, uranium has been hot for a very good reason indeed: prices are up sevenfold over the last five years. Spot uranium hit $85 per pound recently, having doubled in the past year, and you’d be hard pressed to find a market analyst who doesn’t see the price hitting $100 by December. It's quite a reversal of fortunes for a once out-of-fashion metal that was trading in single digits at the turn of the century.

Uranium generates the heat necessary to run nuclear reactors, which used to be the most politically incorrect energy source imaginable. In the 1980s and 1990s, anti-nuclear protesters crowded the streets of Europe and the U.S., inflamed by incidents such as Three Mile Island and Chernobyl, demanding the shutdown of nuclear power plants.

Those protestors have moved on to other issues, and one of the issues at the top of their agendas is global warming. Depending upon which scientist you ask, global warming may or may not be a serious concern, but you can’t deny the anecdotal evidence. January 2007 was the warmest in New England since we began keeping track in 1800; the world's land areas were 3.4 degrees Fahrenheit warmer than a normal January, according to the U.S. National Climatic Data Center. In fact, the U.S. government confirmed last year that global warming is a reality, and is examining ways to either mitigate or cope with it.

What does global warming have to do with nuclear power? Well, 30 billion tons of CO2 (a greenhouse gas) are released into the atmosphere each year by the burning of fossil fuels like oil and coal. Nuclear power plants, on the other hand, release zero greenhouse gases. Since U.S. electric demand is projected to climb by 45 percent over the next couple of decades (and world electric demand even more), we're faced with a choice: burn more fossil fuels, potentially making the world even warmer, or use more alternative energy, including nuclear power. Even developing countries like China and India are turning more and more towards nuclear power, as those countries are looking for cheaper alternatives to oil, gas and coal.

Here is how the numbers shake out, according to the World Nuclear Association: As of December 2006, there were 435 reactors in operation worldwide; 28 new reactors under construction; 64 planned; and more than 158 proposed, globally. As new reactors come on line, there will be increased pressure to fill the gap between supply and consumption of the underlying fuel. The World Nuclear Association forecasts uranium demand to rise 20 percent over the next 10 years; with worldwide energy demand forecast to double by 2030 [OECD], that could be the tip of the globally warmed iceberg.

(China, for its part, has already announced that they will be building a number of nuclear power stations, possibly as soon as this fall. Although China has a great deal of coal, nuclear power is considered a cleaner, more efficient way of producing energy; it is also free from oil’s geopolitical risk, as uranium is mined in “safer” countries such as Canada and Australia.)

Mineral commodity markets tend to be cyclical, with prices rising and falling substantially over the years with the long lead times required to bring to market new material. Uranium is not any different. Uranium’s big jump in price has happened because supplies of the radioactive metal are not rising fast enough to keep up with demand.

There is, however, one important factor that differentiates uranium from other metals. The cost structure of nuclear power generation features high capital costs and low fuel costs. Once reactors are built, it is very cost-effective to keep them running at high capacity. In fact, even if demand for electricity were to drop (which seems unlikely), utilities would cut back on other plants that have higher fuel costs, such as oil and coal-fired generators; the nuclear power plants would keep humming. That’s what happened in South Korea in 1997: the country’s overall energy use decreased due to a recession, but the nuclear output actually rose.

The end result is that demand for uranium fuel is much more predictable than for almost any other mineral, depending almost solely on installed and operable capacity, with little concession to economic fluctuations. In that case, we could be looking at one heckuva bull run.